Liabilities Flashcards
What are current liabilities?
Current liabilities are obligations whose liquidation is reasonably expected to require the use of existing resources properly classified as current assets.
What is accounts payable?
Balances owed for goods, supplies, or services purchased on account.
Occurs when there is a time lag between receipt of goods/services and payment for them. Terms usually state a period of extended credit, commonly 30-60 days.
What does 2/10, n/30 mean?
It means a 2% discount if paid in 10 days, or none and due in 30.
What are notes payable?
Written promises to pay a sum of money on a certain date.
Can arise from purchases, financing, or other transactions.
How can notes payable be classified?
They can be classified as short-term or long-term depending on the payment due date.
What are current maturities of long-term debt?
The portion of bonds, mortgage notes, and other long-term indebtedness that will mature within the next fiscal year.
What indicates higher current maturities?
Higher current maturities indicate more financial stress.
What are short-term obligations to be refinanced?
Debts scheduled to mature within one year after the date of the balance sheet or within the operating cycle, whichever is longer.
What conditions must be met to exclude short-term obligations from current liabilities?
- Company must intend to refinance on a long-term basis. 2. Company must demonstrate the ability to refinance.
What is a dividend payable?
Amount owed by a corporation to stockholders as a result of board authorization.
Are undeclared dividends on cumulative preferred stock a liability?
No, undeclared dividends on cumulative preferred stock are not a liability.
When are dividends generally paid?
Dividends are generally paid within a month.
Are dividends in arrears an obligation?
Dividends in arrears are not an obligation until payment is authorized.
How are dividends paid with additional shares of stock reported?
They are reported in stockholders’ equity and are not a liability.
What are customer advances and deposits?
Returnable cash deposits received from customers and employees to guarantee performance.
How is the classification of customer deposits determined?
Classification as current or noncurrent depends on the time between the date of the deposit and the termination of the relationship that required a deposit.
What are unearned revenues?
Prepayment for services not yet rendered.
What is the accounting treatment when payment for unearned revenue is received?
Debit cash and credit unearned revenue.
What happens when the service for unearned revenue is rendered?
Debit unearned revenue and credit the revenue account.
What does the balance sheet report regarding obligations?
It reports obligations for commitments redeemable in goods and services.
What does the income statement report?
It reports revenues related to performance obligations satisfied during the period.
What is sales taxes payable?
A liability account for taxes due to various governments.
What happens if the liability account for sales tax differs from the governmental formula?
The company recognizes a gain or loss on sales tax collection.
What are income taxes payable?
Any federal or state income taxes payable on net income for the current period, as computed by the tax return.